The Medium-Term Budget Policy Statement (MTBPS) of October 2024 outlines mixed prospects for South Africa’s property market. Modest economic growth forecasts and high government debt dampen demand for real estate, especially as municipalities face revenue shortfalls and rate hikes loom. However, the government’s push for private sector investment in infrastructure could stimulate fixed investment, potentially benefiting the industrial and office property sectors. Yet, overall, 2025 holds cautious growth with limited gains in property values.
Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.
By Neville Berkowitz, The Property Economist,- founded in 1980
Implications for Property Markets
The Medium-Term Budget Policy Statement (MTBPS) released on October 30, 2024, casts a shadow over some property market sectors while shining new hope on others. The projected economic growth of 1.1% for 2024, with a cautious 1.8% per annum forecast for 2025-2027, is unlikely to generate robust demand for property. Prices and rental rates have limited growth potential.
While these projections give a broad market view, regional variances may emerge. For instance, Cape Town and other Cape Province markets may be somewhat resilient but are still subject to overarching economic pressures.
The Gathering Storm
The property sector faces critical challenges due to rising government debt, escalating municipal taxes, increasing electricity costs, and potential interest rate hikes.
South Africa’s debt-to-GDP ratio, officially at 74.7%, is already above the 64% threshold recommended by the IMF and World Bank for emerging nations.
Historically, government borrowings relative to GDP have increased by 2-3% p.a. The current 74.7% could be 77.2% of GDP in 2025, exceeding the IMF’s debt ceiling level of 77%.
Realistically, the debt level could be closer to 85-90% when accounting for State-Owned Enterprises (SOEs) and municipal liabilities. SOE debt alone is around R600 billion, while three-quarters of municipalities—primarily ANC-controlled or coalition-led—face financial instability and significant debt burdens.
According to the National Treasury, in September 2023, municipalities achieved a collection rate of only 56.1% of billed revenue, compared to a budgeted 83.1%, underscoring their liquidity challenges. This shortfall in municipal revenue pressures them to rely on National Treasury funds and bond markets, but with weak credit ratings, many require government guarantees. Consequently, these pressures could fall on ratepayers, further burdening property owners.
Interest rates may also rise as government debt continues to climb. Without a reduction in government expenditure or meaningful economic growth, higher borrowing costs are the most likely outcome. Given South Africa’s junk bond status, attracting investors may require interest rate hikes, which would strain the economy, reducing growth potential and increasing deficits. This scenario, known as the “debt spiral,” looms more extensive than many anticipate, likely impacting property demand and rental affordability across all sectors.
A Glimmer of Hope: Rising Fixed Investment
South Africa’s fixed investment levels remain at 15% of GDP, far below the 30% target set in the National Development Plan. Fixed investment is essential for sustained growth, but investors seek reliable returns over the medium to long term—a confidence lacking in recent years. A positive shift may come from the government’s commitment to increased private sector participation in the infrastructure pipeline, which includes energy, transportation, and water infrastructure projects traditionally controlled by Eskom and Transnet.
However, implementing this Private-Sector Participation (PSP) program will require navigating substantial “red tape.” If the National Treasury’s planned R943 billion infrastructure spending materialises over the next three years, it could boost fixed investment levels and positively impact the broader economy. This spending would invigorate the construction industry and its supply chains, benefiting the property markets for manufacturing, industrial, and office spaces. Increased employment could also stimulate residential demand for rentals and property purchases.
Conclusion
The National Treasury’s strategy aims to stimulate economic growth by increasing fixed investments, boosting tax receipts, and reducing reliance on external borrowing. This optimistic view may positively influence the economy by 2025-2027, though the near-term remains challenging.
The property markets may see limited change in 2025. Interest rate cuts could bring some relief, but risks of further rate hikes loom if government borrowing exceeds a 77% debt-to-GDP ratio—currently at 74.7% with a hoped-for 75% by 2027. As stated earlier, increases of 2-3% p.a. historically occur in government debt to GDP. The 77% high-risk debt ceiling could be breached in 2025.
Rising municipal rates and electricity costs are already outpacing annual rental escalations, eroding returns for non-residential properties. Modest interest rate reductions in the residential sector may foster a positive sentiment. Still, real demand growth is likely to be modest, with consumer debt high and income growth lagging.
These risks and geopolitical uncertainties temper optimism and hold back the confidence needed for a genuine revival in property markets. As it stands, 2025 may be another year of “business as usual” with minimal change in property market dynamics, though glimmers of improvement may appear as broader economic initiatives take shape.
Read also:
